The Reserve Bank of India’s (RBI) move Tuesday disallowing lenders from investing in alternative investment funds (AIF), which have invested in a debtor company, is likely impact the net worth of select non-banking finance companies (NBCs), analysts said.
According to a report by Jefferies, Piramal Enterprises has Rs 4,500 crore or 7% of overall assets under management (AUM) as investments in AIFs, whereas IIFL Finance has nearly Rs 1,100 crore or 2% of its overall AUM as AIF investment as of March end. These AIFs have made investments in debtor firms of the two NBFCs, but the investments are mostly in accounts where the exposure is preceding the last 12 months. Investment in debtor firms where the two NBFCs had any exposure in last 12 months may be limited.
Taking cue from adverse analyst commentary, Indiabulls Housing Finance’s shares tanked the most, closing 11.1% lower at 203.10 rupees apiece on BSE. Shares of Piramal Enterprises also ended trading in the red, down 8% at Rs 885 per share, whereas IIFL Finance shares ended 7% lower at Rs 618.35 per share.
The RBI’s circular had said that lenders shall not make investments in AIFs which has downstream investments–either directly or indirectly–in a debtor company of the respective lender. Debtor company of the lender for this purpose shall mean any company to which the lender currently has, or previously had, extended a loan, or had investment exposure anytime during the preceding 12 months.
Separately, the RBI said if an AIF scheme already has a lender as an investor, and still makes a downstream investment in any debtor company of the lender, then the lender shall have to liquidate their position in the scheme within 30 days from the date of such downstream investment by the AIF. If the lender is not able to liquidate its position investments within the prescribed time limit, they shall make 100% provision on such investments, RBI said.
Jefferies said while it awaits more clarity, if Piramal Enterprises and IIFL Finance have to provide against its entire AIF exposure, including exposures before 12 months, the hit to IIFL’s net worth could be -8% and -10% for Piramal Enterprises.
Further, according to IIFL Securities banking analysts Rikin Shah and Viral Shah, the regulator’s move will lead to redemptions by banks and NBFCs from the AIFs. AIFs have till now made total commitments of $100 billion in India and have already made investments to the tune of $42 billion as of June end. The move will also lead to potential mark-to-market (MTM) loss for lenders as they liquidate these positions within prescribed 30-day timeline, or alternatively make provisions.
“With the loophole plugged, we expect some stressed accounts to be recognised as NPAs (non-performing assets) in the coming quarters,” they said.
A senior analyst with a large brokerage house also told Fe that while banks will not have major impact due to the RBI circular, select NBFCs will have a higher single digit impact on net worth. He said the RBI has acted proactively by taking such step before “the problem becomes big”.
“This is to safeguard retail investors and retail funds from being used via institutional route. Foreign funds are major inverters in AIFs but as industry becomes larger, slowly domestic institutions may come and invest in this new avenue, which regulator wants to be clean,” he said, adding that globally central banks have also taken such steps in past to preserve financial stability, but the regulatory moves also faced intense lobbying by large global investors, a trend that may follow in India after the RBI issued its circular Tuesday.